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Guarding against fraud now crucial

Microscope contributor


Preventing fraud is a headache at the best of times but having the right controls in place to manage such instances could be crucial for resellers and distributors to survive as the slowdown bites.

The channel has often battled with company hijacking, VAT scams, cardholder not present (CNP) fraud and more recently long firm fraud.
But as customer orders slow and project sign-offs are delayed there are growing concerns that criminals will use the slowdown to exploit companies under pressure to hit targets.

It is against this backdrop that credit reference agency Graydon UK launched the Reseller Intelligence Network, an information sharing service that alerts members to attempted or perpetrated frauds.

“Distributors have wised up to fraud over the last few years and credit managers have learned the tricks of the trade and have been able to avoid getting caught out,” says Mark Ancell, head of intelligence at Graydon UK.

Fraudsters, he suggests, are moving to the reseller community because it is seen as a comparatively easy touch.

At £500 to join, Graydon’s service could represent good value for money – potentially paying for itself if a large fraud is nipped in the bud – but that hinges upon the quality of information provided.

“We have been stung in the past and given what is happening in the economy, fraud attempts probably will go up, so anything that helps to prevent them has got to be worth it,” says Softcat managing director
Martin Hellawell.

Separating genuine orders from CNP scams has become a daily grind for online resellers, which has an obvious cost to business in both the time taken to pinpoint frauds and in potential lost orders.

“The true cost of fraud is not just the money lost through the scam but the staff time it takes to review orders and the damage to customer service when you turn down a legitimate order,” says Easy Computers managing director Nick Glynne.

He estimates that it turned down £4.8m worth of orders last year because customers were either not on the electoral roll, had multiple email addresses or no landline.

“They were just too risky,” says Glynne, adding that merchants are
liable for chargebacks.

According to official figures by the Association of Payment Clearing Services (APACS), CNP fraud rose 18% from January to June 2008 to £161.9m.
Yet the police do not have a mandate to investigate merchant fraud and credit card issuers have not promoted existing measures to counter CNP fraud in the high profile way they did with Chip & PIN.

The measures include Verified By Visa and 3D Securecode from Mastercard but neither covers phone orders, which is still how many e-tailers transact part of their business.

Company hijacking or identity theft has become more prevalent in recent years and despite the controls and checks put in place by distributors, the fraudsters are getting results in some cases.

As exclusively revealed by MicroScope (4 February), Westcoast was the victim of a £300,000 ID scam.  Fraudsters posing as a customer, The Book Service, used the company name, registration and VAT number to apply for credit with Westcoast subsidiary Orion Media Marketing.

However they changed the phone number, email and delivery address and when the toner cartridges were delivered, they disappeared without a trace. This type of fraud could also be shifting to the reseller community.

Stewart Hayward, commercial director at WStore, said it recently thwarted a fraud attempt by individuals who took control of a dormant company on Companies House and faked two years of financial reports to present a trading history.

But the credit controllers at WStore were suspicious of the orders for laptops, because there was no haggling on price or spec, and blew the whistle before the PCs were shipped.

“I think the level of fraud in the UK is where it was a year or two ago but the fraudsters are definitely getting more sophisticated,” Hayward told MicroScope.

Long firm fraud is an example. Some fraudsters will operate as sole traders but most will set up an operation by buying an off-the- shelf company at minimal costs and with false directors’ names. Suppliers are lulled into a false sense of security as the fraudsters place smaller orders to build up creditworthiness before placing much bigger ones and disappearing over the horizon.

Spike in fraud

In the last downturn “there was a huge spike in fraud,” said Hitesh Patel, partner at KPMG Forensic.

“In general terms all type of fraud will go up due to the pressure of the downturn.”

But he warns that the enemy can often lie within a firm and irregularities that indicate fraudulent behaviour are sometimes only uncovered during a downturn.

“When business is booming, company [owners] rarely look over their shoulders but when things get tight they batten down the hatches and inevitably discover some things have not been done properly,” he said.

According to some estimates, the recession could continue next year and into 2010. Whether resellers are hit by fraud could depend on common sense – if an order is too good to be true, then it probably is.

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